Why shunning Private Mortgage Insurance makes sense?

You may not have saved enough to buy your own home yet. What if you come across a good property deal at this point of time, and your financial resources aren’t even enough to make the down payment? It’ll be disheartening to let go of the deal, especially if the house or the property is almost the way you had wanted it to be. You can opt for a mortgage, but lenders usually don’t allow the loan if the down payment amount is less than 20% of the total loan amount. Well, Private Mortgage Insurance (PMI) will come to your rescue at this point of time.

How PMI works?

Private Mortgage Insurance doesn’t work as other insurance policies. Instead of protecting the one paying for it, a PMI policy offers protection to the lender. You’ll need to buy PMI, if the loan to value ratio is more than 80%. Usually the home buyers, who are the prospective borrowers as well, don’t have any other option than to pay for the PMI, if their down payment amount is less than 20% of the home sale price. This form of insurance minimizes the risk for the lenders, since if you’re unable to pay the mortgage later on, the insurers will pay off the outstanding balance on the loan. Just because you have this option, which lets you buy your house in spite of having insufficient funds, it doesn’t mean you’ll depend on it completely. PMI might be the best way out for the new homebuyers, yet it should be avoided unless absolutely necessary. Read along to know the reasons which should prompt the prospective home-buyers to stay away from Private Mortgage Insurance.

Why is it sensible to avoid PMI?

The following reasons might convince you that PMI is not as good as it seems:

1. Raises the cost - Evidently, paying for the PMI would count as an extra expense for the purchaser of the home. The annual PMI usually ranges from 0.5% to 1% of the entire loan amount. If the present home values be considered, it amounts to a lot of money which the homeowner would need to pay per year. The larger your home, the more will be the loan amount and consequently the PMI would also cost more.
2. Tax deduction limits might not be applicable for most – PMI is regarded as tax deductible. However, the income cap is too less for the taxpayers. Tax deductions are only applicable if the gross income of the married couple is less than $110,000 per year or less than $55,000 for each, if they file separately. Therefore, the homeowners earning more than the set limits usually don’t enjoy the tax benefits on PMI. Thus, it makes more sense to make a large down-payment than to keep paying for PMI.
3. No benefits for the homeowner or his survivors - Traditionally, insurance policies are supposed to yield benefits to the policyholder and/or his family members, survivors or dependents. PMI compensates the mortgage lender, in case the borrower is unable to pay back the loan. Though, in a roundabout way, it helps the homeowner and his family, since the outstanding loan balance would otherwise be considered as their debt, the heirs of the policyholder don’t receive any benefits from the policy directly.

Apart from the above mentioned reasons, a PMI might take a long time to cancel. In reality, the homeowner can stop paying for the PMI, when the home equity goes above 20%. However, cancelling the policy might take a few months, and the homeowner needs to keep paying for the PMI till then. Some mortgage lenders even put a time limitation for the homeowners, according to which they need to continue with the PMI payments for the specified time period, even after the 20% threshold is met. After knowing all these reasons, don’t you think it’s sensible to avoid a PMI? You can’t deny that it raises the cost of your home loan.